Senators to ED: Justify or End Contracts With Private Loan Collection Agencies
By Joelle Fredman, Communications Staff
A group of democratic senators sent a letter to the Department of Education (ED) Tuesday to express their concern about the use of private collection agencies (PCAs) for student loan borrowers in response to ED awarding new contracts worth millions of dollars to two private firms at the beginning of the month.
The senators— Kamala Harris (D-CA), Elizabeth Warren (D-MA), Patty Murray (D-WA), Kirsten Gillibrand (D-NY), Catherine Cortez Masto (D-NV), Ron Wyden (D-OR), Mazie K. Hirono (D-HI), Patrick Leahy (D-VT), Sherrod Brown (D-OH), Richard Blumenthal (D-CT), Richard Durbin (D-IL), and Dianne Feinstein (D-CA) — insist in their letter that ED either justify its use of PCAs, or stop using private companies to hound students who have fallen behind on their payments.
"The student loan program is designed to help borrowers receive access to credit at terms more favorable than what the private market would otherwise provide," the senators wrote. "This extends to the repayment process, where struggling borrowers have several options available to reduce or pause repayment. These benefits demonstrate the federal loan repayment is about the long-term success of borrowers, not simply maximizing funds repaid."
Their letter comes a few weeks after ED announced that it awarded two firms, Performant Recovery Inc. and Windham Professionals, new contracts worth up to $400 million dollars and terminated seven other contracts. One firm that was cut was Transworld Systems Inc., which was involved in a lawsuit last year after it was found to have messy and illegal collection methods.
The senators argue that ED overpays PCAs and allows them to collect more funds from taxpayers than their expenses. According to the Office of Management and Budget (OMB), PCAs will receive $1.4 billion in taxpayer subsidies in 2018. For every dollar in cash these firms collect from borrowers, ED pays them $40.
"Collectors may be receiving hundreds or thousands of dollars for the cost of placing a few phone calls or sending a few emails," the senators wrote.
They also argue that using PCAs to collect funds will cost the borrowers more because they are responsible for covering their own collection costs, and PCAs may continue to pursue students for small amounts that would otherwise be excused in order to benefit from these added fees.
And it’s not only the financial cost of enlisting PCAs that the senators are concerned with— they also warn ED that these firms do not have students’ best interests in mind. For example, they argue that PCAs have a history of pushing borrowers into loan rehabilitation because it is more profitable for them, while loan consolidation has been found to be a better option for students.
"The Department is rewarding these agencies for behaviors that work in opposition to the prospect of student borrowers. The very goals of private collection agencies are not aligned with the goals of federal student aid programs," the senators wrote.
The senators requested that ED answer a list of questions about the value of PCAs for taxpayers and borrowers by February 13.
Publication Date: 1/25/2018
Joelle F | 1/25/2018 5:42:18 PM
Hi Felicia,
You can find more information about that finding in the CFPB report I linked to in the article here: http://bit.ly/2kJFtCh
The report says: "Borrowers and taxpayers both benefit when borrowers successfully complete the default to IDR transition and succeed over the long-term. The current compensation structure for debt collectors reflects this benefit by incentivizing collectors to rehabilitate loans - in some cases, collectors earn nearly $40 in compensation for every $1 in cash recovered through certain rehabilitations. Collectors earn this compensation irrespective of borrower performance over the months or years following a completed rehabilitation, ensuring that collectors have no “skin in the game” when a borrower defaults again. Policymakers may wish to reevaluate the economic incentives in place for debt collectors and student loan servicers to encourage long-term borrower success."
-Joelle Fredman
NASFAA Reporter
Felicia P | 1/25/2018 1:10:04 PM
I still cannot believe that $40 is being paid for every $1 collected. How does that number remotely work? So, we collect $100 from the student, but pay $400? There has to be a typo or maybe I need to re-read the article.
Janet I | 1/25/2018 12:13:26 PM
Yes it is awesome but too bad it doesn't involve all of our representatives questioning ED on these insane practices that cost taxpayers millions and ruins the financial future of so many lives. These types of companies are driven by GREED not the interest of the borrowers or the taxpayers.
Daniel R | 1/25/2018 12:13:07 PM
If Default Management companies could collect payments it could be an alternative, assuming collection agencies are as stereotypical as the Senators assume. You have to have really neglected repayment for more than just a few months to then default on Federal Loans and then get sent to collections when IDR options and Forbearances are so readily available. They have not simply "fallen behind". Most large universities use collectors such as these, must we now justify why we're using a third party to enforce the terms of the prom notes? At what point do we ignore an expectation that students we've educated take more initiative over their finances? The real solution is to allow more bankruptcy cancellation for "hard cases". Those really struggling could then get back on track. Otherwise we teach borrowers that ignoring a problem will make it go away.
Louise D | 1/25/2018 10:14:38 AM
Why do they not use Default Management companies who are already doing this job and work well with the students? Universities are having to pay private companies to help them keep their default rates down and these companies work hard to do this for the schools but their main goal is to help the students and they do know what is best for the student and works with the student to accomplish this goal for them.
Arlesha C | 1/25/2018 9:35:41 AM
Awesome! Finally someone is questioning this decisions made by ED.
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